Walmart Business Model Study 1.

Introduction Saving people money so they can have a better life Walmarts mission on which its business model is based on. The current President and Chief Executive officer of Walmart; Michael Duke stated that the company is well positioned in todays difficult economy and tomorrows changing world (WM Annual Report, 2008). With $405 billion in revenues net sale (WMAR, 2010), Walmart is said to be World largest retailer in the world and the largest employer in the US (Basker, 2007). 2 million associates in more than 8,400 stores around the world Walmarts serve more than 200 million customers and members each week. Walmart has grown in the US market because it connects itself symbolically to the dominant ideologies of American life. As a matter of approach, Walmart chains are assumed to focus on sales and margins in the short run. Indeed its Everyday Low Pricing format has catapulted it into the leading grocery chain in the U.S and International that was very successful (Jones, 2004). 1.2. History Walmart is an American public corporation that runs a chain of large discount department stores and warehouse stores that operates in various formats around the world. It was found in 1962 by Sam Walton Headquartered in Bentonville, Arkansas. From the beginning Sam Waltons guiding philosophy for his stores was to offer consumers a wide selection of goods at a discounted price. The strategy of the company was locating stores in small towns where residents had few options for retail shopping. Walmarts success in small towns led to criticism that the stores took business away from small, hometown merchants (Magretta, 2002). When Walton died in 1992, the adjustment to a post-Sam environment proved difficult. Even though Walmart executives had emphasized for years that their company depended on a set of principles and habits more than it did on any one person, Walton's death wound up marking a fateful shift in how the company was perceived. Between 1997 and 2001, the company's stock value increased by over 500 percent, rising by 70 percent in 1997 alone. This undoubtedly helped to mollify employees who'd been unhappy with the slump earlier in the decade. (Frank, 2006) 1.2 Walmart today Today, with $288 billion in annual revenues (more than Switzerland's GDP) and over $10 billion in profits, Walmart is the world's largest corporation, according to 2005 Fortune 500 list. It operates over 5,000 stores worldwide and employs over 1.6 million people (Frank, 2006) Walmart USA alone has more than 4,300 stores employing more than 1.4 million associates including Walmart Discount Stores, Walmart Supercenters, Walmart Neighborhood Markets and Market side. In 2004 Walmart handled 8.8% of U.S retail sales and the number has since been increased. Meanwhile Walmart International is consist of more than 4,000 stores and 800,000 employees in 14 different countries (Basker, 2007)

Figure 1. Net sales in 2010 were a record $405 billion. (Walmart Annual Report, 2010)

2. Walmarts Business Model A business model describes the rationale of how an organization delivers, captures and creates value(Osterwalder & Pigneur, 2010:3). Although Johnson et al.(2008) considers only four key elements of the business model, the analysis of Walmarts Business Model will follow Osterwalder and Pigneurs (2010) Nine Building Blocks.

Figure 2: Osterwalders 9 point decomposition of a Business Model (Chesbrough, 2010) Value proposition Walmarts value proposition is based on offering Everyday Low Price (EDLP). This is the core of Walmarts Business Model, and the rest of the key features of Walmarts Business Model are aligned to keep the everyday low price. This proposition implies that the customers do not need to wait for sales to have the best deal possible (Manning et al., 1998). Besides, not only the sells convenience is associated by providing the wide range of products and services to choose from, but also with one-stop is possible to make all the shopping needed, from groceries to pharmacy (Basker, 2007). Walmart customers save time and money. Distribution channel To deliver its value proposition Walmart communicates with and reaches its customer segments with its distribution channels which are owned and direct, and brings higher

margin. Walmart also is corresponding with its customers mainly through mass media and other ways which have a low cost, such as internet. Customer relationships & Customer segment Walmart establishes a customer relationship is based on self-service and automated and towards co-creation of some products once it is possible. Walmart tends to reach to the mass market toward mass customisation. Walmarts customers can be divided into three groups: brand aspirations, people with low incomes who are obsessed with brand; price-sensitive effluents wealthier shoppers who love deals; and finally value-price shoppers who like low prices and cannot afford much more (Barbaro, 2007). Key activities The key activities which are needed to run Walmarts business model are:

Other activities would be to create products that will cover needs of a specific customer segment and to control the brand, which has been developing lately. Walmarts technological edge is in its inventory control, logistics, and distribution (Basker, 2007). The ability to move products place to place quickly and efficiently keeps the costs down as well as the time system in combination with logistics force permits Walmart to have accurate time information of the products in the stores shelves that allows restocking automatically (Tierney, 2004). In addition the logistics involves the suppliers and workforce of 85000 employees, 147 far reaching distribution centers, transportation offices, more than 100.000 tractors and trailers and 8.000 drivers (Walmart logistics facts sheet). Key resources The key resources of Walmart classified in 3 categories. First, the physical resources which are owned by it like stores and logistics. Second its human resources, experienced managers and stores managers, and finally the company culture. Walmart culture is based on restless effort at constant self-improvement, discipline and loyalty (Fishman, 2006). Key partnership Key partnership is a strong buyer-supplier relationship in which suppliers were considered as close partners of Walmart. They also are part of the value chain of each other and it provides suppliers the chance of accessing to a large market. However it made suppliers, who wish to take advantages of its broad market, to keep their prices and costs low and therefore, suppliers give the control of their own business and negotiation advantage to Walmart (Parnell and Lester, 2008). Walmart also creates economies of scale that optimizes its cost structure. Revenue stream Walmart Revenue Streams that generated from its customer segments are basically come from retail sale, such as music downloading with fixed menu pricing. Walmart also drive

revenue from selling its own brand, produces by others to cover a segment not cover by other suppliers. Moreover, it takes advantage of selling goods before paying to its suppliers. Cost structure The Cost structure is cost-driven model since it is focused on minimizing costs wherever it is possible and it is characterized by economies of scale. The expansion of Walmart allowed it to benefit from economies of scale and reducing its cost besides its technology let it to grow and caused to lower its costs; hence, economies of scale at both the chain levels and stores strengthen Walmarts advantage, rather than being its root cause (Basker, 2007). Walmarts financial discipline is well known as well as their tendency to pass operating costs to suppliers. 3. Validity of Walmarts Business Model Walmarts wholesaler Business Model is based on cost leadership business strategy (Johnson, Scholes, and Whittington, 2010). Using Chesbroughs business model framework classification (Chesbrough, 2007), Walmarts Business Model is an adapt platform. The company is committed to experimentation, and its key suppliers have become business partners, sharing the technical and business risks, integrated into the planning processes of the company. This type of business model is a valid one, very profitable. Walmarts Business Model is a role model (Baden Fuller and Morgan, 2010) a model to be copied but on the other hand, is hard to imitate since it has constantly adjusted and improved their processes over time. Although its size and economies of scale is a competitive advantage, there is a downturn on the way it does business. Consumers have expressed concerns about the so called Walmart effect, the high cost of low prices (Fisherman, 2006; Basker, 2007). Firstly, Walmart eliminates local competition creating a monopoly effect. There is a lot of discussion on the press and academics (Basker (2007) comply the main discussion) about Walmarts effects on the communities where stores are settled. Normally, the effects can be summarized in reduction of local competitors, which implies reduction of local jobs. Walmart job creation is not always sufficient to cover the jobs lost (Basker, 2007; Fisherman, 2006). In relation with its suppliers, it comes to a point that no more efficiency can be done. Eventually, the only way to reduce costs is to manufacture products outside the USA, to countries with lower labour costs and with fewer regulations, specially labour and environmental, which means Walmarts suppliers can be less social responsible than Walmart. Walmarts responsibility in the globalization and the USs flatness economy is perceived by the consumers (Fisherman, 2006, Basker, 2007). These have been current concerns for Walmart while developing its CSR strategy during the last five years. On the other hand, Walmarts cost control means that nothing can be expended on other services that adds value to the customer experience. While Tesco centers itself in improving the customer experience (The secret of Tescos expansion success), Walmart almost only does in improving effectiveness. Walmart has identified correctly the customers segment to which deliver its value proposition. However, this is not appropriate in every market. And Walmart can only

approach the segment that it is already serving. Walmart has been so successful in offering itself as a discount retailer that nobody expects premium products if there are, the suppliers branding suffers (Fisherman, 2006). Also, other competitors are taking advantage on the inability to adapt to different segments (Fisherman, 2006) Another negative aspect of Walmart cost control is the relationship with its employees, associates. Cost control with the core value around which Walmart has been built, hard work, implies that associates and even managers and work too many hours, applying sometimes illegal practices (e. g. closing the associates inside the stores, women discrimination etc.) (Fisherman, 2006). Walmarts is against unions, since union workers salary are higher than non-union employees. 4. The future of Walmarts Business Model 4.1 The main fine tuned objectives: Customer focus Walmart's success is based on its business model which focused on satisfying its customer needs with low price products. However, due to the environmental changes and some factors of the business model that can be easily imitated by its competitors, Walmart has to continuously modify its competitive strategy and to develop its business model to maintain its competitive advantage in the global market. David Glass, Director and former CEO of Walmart Stores, Inc., said, "We have made it to where we are today by appreciating and satisfying our customers and associates, they are the people who make the difference. Walmart focuses not only on its customers' needs, but also encourages participatory involvement of its employees. Furthermore, its information technology strategy involves a sophisticated data managing (John, F. Kennedy, 2005). Randy Mott, former Senior Vice President and Chief Information Officer explained, "Our investment in data mining is part of Walmart's drive to deliver what its customers want: the right item, at the right store, at the right time and at the right price."(John, F. Kennedy, 2005) In order to achieve the objectives of satisfying customers, enhancing shareholder value and creating the profits, Walmart has three important priorities: growth, leverage and returns. Walmart is continuing to grow around the world through a number of opportunities from opening new stores, entering in new markets, making acquisitions, integrate online channels, and develop new, innovative formats to provide customers to experience the Walmart brands. Based on the three important priorities, Walmart keeps on improving the supply chain predictability and visibility to affect greatly the amount of inventory safety stock that a retailer must maintain in its network. Walmart not only focuses on the tactical efforts to lower costs and improve gross margin, but has looked into the impact of reducing inventory and storage or handling costs associated with excess safety stock. Currently Walmart maintains just under less 40 days of inventory on hand throughout its massive network (Kinshuk Jerath 2008). With one day reduction in inventory, Walmart can create approximately $1.7 billion of additional cash flow from operations, which is a mean of low cost, and achieve generate profitable revenue (Kinshuk Jerath 2008).

4.2 Walmart's strategy and its business model innovations This section provides some ideas for how to innovate Walmart business model further. Low cost strategy The core strategy of Walmart is "Everyday Low Prices" as its slogan states, in which the undercutting of prices is the basic principle of Walmart's business, which means low price products for customers. In order to achieve the strategy, innovation in Walmart can generate an assessment of its current business model and find an appropriate way to develop or change (Drucker, 1994). Information technology innovation Walmart utilizes information and communications technology in order to aid in the decisionmaking process and advanced the effectiveness on the response to consumers, as well as through the information technology to control the process of logistic (Chesbrough, 2003). Technology innovation of Walmarts business model involves process and service technology innovation, both of which can reduce the operation cost and time. Also the price of products can be reduced through the process of delivery and storage using new technology. And customer service within new technology will add more value in the same price and create a positive image for customers. In order to keep track of its logistics Walmart tries more and more to rely on so-called radio frequency identification (RFID) technology (Wailgum, 2008). This technology uses a system to communicate through electromagnetic waves in order to exchange data between a terminal and the electronic tag which is attached to the delivery box. The purpose of this is their identification and tracking. Some of these tags can be recognized from a few metres away others from even greater distances. Human resource management innovation Based on new ideas of relationship of its employees within the organization, Walmart develops its human resources policy to adapt the changing environment. All of the employees of Walmart from top manager down to the clerks are called "associates", in which everyone receives a great autonomy and continuously keep communicating according to their performance within the company and about the operations of the stores (Demense, R. &Gardner, N. 2002). This relationship and Walmarts efficient incentives provide a strong safeguard for achieving its strategy. The recruitment of people with the proper skills, competence and working experience can influence the morale of all employees. The problem with motivation as well as the remuneration of Walmart associates has been given a lot of coverage in the news in recent years. These articles complain about low wages and sparse benefits for the ordinary workers (Luce, 2005). Therefore, financial incentives and other forms of motivations must be constantly evaluated and adapted to ensure the satisfaction of the associates.

Organization and management styles The management of Walmart has been based upon the values and principles of the founder. The managers always keep in touch with their customers as well as the operations on the retail stores, which leads to an effective communication between each store and the company's headquarters (Sims, 2002). Walmart puts a lot of effort on the innovation and development of its organization and management. Supplier relationship development In order to achieve the objective of low price, Walmart used to adopt the centralization purchase, in which all the transactions took place at the headquarters of Walmart. Furthermore, Walmart also refused to negotiate with manufacturers from the year 1992 and only allowed them to supply no more than 2.5% to avoid the dependence on a manufacture (Raflamme, 2009). However, in order to compete in the global market, Walmart also needs to establish closer cooperative transactions with its local suppliers, which aligns with the needs of its consumers and lowers the inventory cost. Moreover, since 2008 Walmart (and its subsidiary Sams Club) also requires its suppliers to attach RFID technology to their deliveries. Otherwise these suppliers can face tough fines of up to 2-3 US$ per delivery (Wailgum, 2008). Distribution and storage The cost of distribution and storage is a big part of the products selling price. Thus, Walmart handles 80% of the purchases that are directly shipped in the warehouse in order to reduce the cost of logistics. However Walmart is still continuously upgrading and innovating its process and system of distribution where the products that arrive via the inbound trucks are loaded and unloaded on outbound trucks without sitting first in the inventory of the warehouse. Social responsibility and sustainability Dealing with the imitation of low cost business model by competitors in the context of a global market, Walmart needs the innovation of technology, organizational management, relationship with suppliers and distribution services. Furthermore, Walmarts objective to establish itself as a key player in the society must incorporate cost innovation capabilities and social responsibility into their future business model which looks promising as indicating ways to sustainability (Zott & Amit 2007). During the last years Walmart has therefore tried to rebrand itself as a pioneer in environmental sustainability. By 2011 they want to reduce the phosphates in detergents by 70 percent and the amount of packaging material by 5 percent until 2013. They have classified their involvement into five categories: sustainability, feedback to communities, care for the children, support for education, and disaster relief. For the last 13 years these employees have spent more than 180,000 in voluntary work for public interests in their communities (Walmart Social Responsibility Report, 2010). 5. Limits to the Low-Road Business Model Two thousand and twelve, the year of Wal-Marts 50th anniversary, has proven to be a momentous year for the worlds largest retailer, though not in the way company officials

anticipated. This year, in the wake of a major scandal involving the apparent violation of the Foreign Corrupt Practices Act, the company, faced an unprecedented revolt of shareholders, with roughly a third of outside shareholders voting against current CEO Mike Duke, former CEO Lee Scott, Chairman Rob Walton, and Audit Committee Chair Chris Williams. During the 2012 fiscal year, Wal-Marts same-store sales turned positive, a welcome development after nine consecutive negative quarters, and in the second half of the calendar year the companys stock price experienced one of the strongest runs in years. But this apparent success may not be an indicator of any fundamental turnaround: the companys same store sales are still negative on a 3-year basis, and the companys stock returns year-todate are merely on par with those of the S&P 500 Retail Index. And with signs that the company is facing increased unhappiness among Wal-Mart associates, there may be major challenges in the companys future. As the national political debate has, over the past year, turned to questions of income inequality and corporate influence in politics, Wal-Marts low wages and its impact on US manufacturing brought unwelcome attention to the companys business model. Meanwhile, the extreme wealth of the Walton family heirs, and their own right wing political activism, has seemed to underscore the companys role in generating inequality of both wealth and power. Whatever the outcome of this national political debate, it would appear that as a consumer company with one of the most recognized brands in the world, Wal-Mart currently faces a significant level of risk. So do its investors. Wal-Mart workers on strike On Thursday October 4th, 2012, 70 Wal-Mart associates walked off the job at nine stores in the Los Angeles area. After a period of relative quiet in the preceding several months, and a series of attempts to reach out to company executives, workers throughout Wal-Marts distribution chain have begun to respond more forcefully to the companys increasing retaliation against worker efforts to raise standards at the company. Meanwhile the risk of continued labor conflict, and the potential impact it may have on the companys reputation, casts a shadow over the Wal-Marts plans to ramp up a new phase of small-format growth in US urban markets. Workers like myself have been calling on the company to address issues with scheduling, benefits, wages and above all, respect in the workplace. But instead of being responsive, WalMart has lashed out at us for speaking up. The company is trying to silence and intimidate us through unfair disciplinary actions, cut backs in hours and even firings. Were on strike to protest these illegal attempts to silence us, said Venanzi Luna, a striking Wal-Mart associate from Los Angeles. The retail store workers strike in Los Angeles follows two separate strikes by workers in Wal-Mart-controlled warehouses in Southern California and Illinois, where workers had long complained of systematic wage theft, health and safety dangers, and abusive conditions on the job. In both cases, and in the retail store strikes as well, the precipitating event appears to have been the companys retaliation against workers who tried to speak out.

Retaliation against associates Wal-Mart recently fired several workers active in the Organization United for Respect at Walmart (OUR Walmart), despite a promise from Wal-Marts Senior Vice President of

Global Labor Relations that the company would not retaliate against workers who join the organization. Other workers have been intimidated by store managers. Over the past few months, in response to these reprisals, dozens of Unfair Labor Practice (ULP) charges have been filed by OUR Walmart on behalf of OUR Walmart members who have experienced retaliation for their activities with the organization. These ULPs fall into three general categories: Terminations: workers have been terminated by Wal-Mart in retaliation for their participation in OUR Walmart Threats: workers have been threatened with loss of job or store closings in retaliation for their activities with OUR Walmart Reduction in hours: retaliatory reduction of hours for workers who have been involved with OUR Walmart

These abuses have come in a larger context where managers have been waging an anti-OUR Walmart propaganda campaign in stores around the country, complete with a corporateproduced slide show playing in an endless loop in break rooms, and which depicts OUR Walmart as a front group trying to steal associates money. Low staffing continues to impact operations Many of the concerns raised by OUR Walmart members boil down to hours and staffing levels, and appear to be directly related to the significant cost cutting Wal-Mart executives have been pursuing. Over the past several years Wal-Mart management has emphasized the apparent success of what it calls the productivity loop whereby expense reductions are used to fund investments in price, which are intended to increase traffic and sales, which then presumably provide the basis for further investments in price. While a large portion of these expense reductions have come from removing labor from the stores, management has consistently asserted these cuts have not impacted operations or customer service. Indeed, in August Wal-Mart touted new labor saving technologies which they say will allow the company to reduce headcount without impacting customer service. But frontline Wal-Mart associates from across the country have disputed this contention by company executives. The stores are, they believe, struggling to manage day to day operations without adequate staffing. A year ago, after Wal-Mart associates and industry analysts first began to argue that the company was suffering a significant number of out of stocks2, the company acknowledged it had been experiencing a problem, changed the metric it used for measuring in-stock levels and claimed the problem had been addressed through a new inventory and stocking system, but few associates appear to have been informed of this new system. Wal-Mart associates continue to observe significant problems related to understaffing. Over the past month many associates have documented these problems with photos (printed throughout this report). Wal-Mart has cut employees hours and cut the labor costs to a point where it actually is harming not the just the workers, but it affects the operations day to day of the store and it also affects the customers, Lori Amos, a 16 year Wal-Mart associate, told Reuters. Despite these challenges, Wal-Mart executives appear to be extending the low-staff model even further with the planned re-launch of the companys Neighborhood Market format, which, according to management statements and press reports, is able to achieve higher

returns on investment through significant reductions in staffing as well as minimized construction costs in the initial building phase. Whether or not this will work remains to be seen, but what is clear is that Wal-Mart executives, rather than investing in more associates and higher levels of customer service, are doubling down on their bare-bones-staffing strategy. Workforce investment is profitable Despite Wal-Mart executives insistence on cost cutting, the members of OUR Walmarts demand for improved staffing are not inconsistent with a desire for profitable business. Contrary to popular managerial belief, which holds that payroll at low-cost retailers should be kept as low as possible, recent research shows that spending more on staffing, in terms of wages, hours and training, can help rather than hurt a retailers bottom line. In a study of four low-cost retailers, Costco, Trader Joes, Quiktrip, and Spanish supermarket chain Mercadona, Professor Zeynep Ton of MITs Sloan School of Management found that these four chains, which invest substantially more in training and payroll than their peers, also have substantially higher asset and labor productivity than similar companies with leaner payrolls. These companies, which operate using what Ton calls a virtuous circle, generally provide full-time jobs with room for advancement, above-industry wages, and predictable schedules, and they experience lower turnover and higher sales per labor hour than peers. Customer service at these stores also receives notably higher ratings than the industry as a whole.4 Similarly, researchers Marshall Fisher, Serguei Nettesine and Jayanth Krishnan at the Wharton School found in an analysis of 17 months of data for a large retailer that the impact on revenue of increased store staffing is incredibly high. According to Marshall, on average, revenue increased by $10 for every additional dollar of payroll added to a store, and for some stores that were particularly understaffed, the revenue lift was as high as $28.5 Deteriorating customer service If the national surveys are accurate, consumers generally do not like shopping at Wal-Mart, and the issues cited by customers who dislike their experience in Wal-Mart stores appear to be directly related to staffing problems. University of Michigans American Consumer Satisfaction Index (ASCI) ranked Wal-Mart last among Discount and Department Stores in 2011, with a score that had decreased 4.1% since the previous year and 12.5% since 1994.6 (ACSI uses data from customer interviews in an econometric model to score customer satisfaction on a 1-100 scale.) Notably, Wal-Marts score declined from the low 80s 15 years ago, to the high 60s in 2011; and from consistently above the average for Department & Discount stores to consistently below during that time period. This deterioration in relative performance is consistent with Wal-Mart associates perception that there has been a significant change in the companys approach regarding customer service. Similarly, Wal-Mart performs badly in its grocery business compared with other supermarkets. Meanwhile, Consumer Reports ranked Wal-Mart second-to-worst among supermarket chains in its most recent survey of the industry, in which 24,203 people participated. Consumer Reports found that Wal-Mart received the lowest marks for service. Similarly, in a separate Consumer Reports survey of shoppers at general retailers, a category including

Wal-Mart, Sams Club, and eight other clothing and general merchandise retailers, Wal-Mart received the lowest score and Sams Club was ranked 8th, while Costco took the top spot. Consumer Reports noted that Wal-Mart shoppers were especially likely to complain about long checkout lines and inadequate customer service. Health and safety risks Many Wal-Mart associates believe the low staffing levels contribute to safety risks at the company, and clearly Wal-Mart management has struggled with safety violations in its stores, at times resulting in an unsafe working environment for employees and an unsafe shopping environment for customers. The company has had particular trouble managing safety risks on Black Friday. In November 2008, a 34-year-old temporary Wal-Mart employee was trampled to death early in the morning on Black Friday at a Supercenter in Valley Stream, New York. OSHA cited the company in 2009 for inadequate crowd management, issuing a meager $7,000 fine for the incident. The citation was upheld in March 2011, after the company spent more than $2 million on legal fees contesting the fine, arguing that crowd trampling should not be considered an occupational hazard that retailers have a responsibility to try to prevent. Though there have been no reported deaths at Wal-Mart during Black Friday since the fatal accident in 2008, Black Friday violence and trampling continue to occur at Wal-Mart stores around the country. The Associated Press reported that in 2011, there were violent incidents in at least nine Wal-Marts around the country in which 24 people were injured. In one case, an off-duty police officer used force that made a 54-year-old man fall to the ground and lose consciousness. The man had put a video game in his pants to free his hands to help his young grandson, who had been trampled, when police approached the man, accused him of shoplifting, and knocked him to the ground. In 2012, Wal-Mart was charged sizable penalties by OSHA for repeat safety violations in two separate instances, totaling $418,000. Given that the maximum civil penalty from OSHA for a non-repeat serious violation is a mere $7,000, the fines issued to Wal-Mart stand out as especially sizeable. The larger of the penalties (related to blocked emergency exits, lack of safety procedures for control of power hazards and other problems), issued in February for $365,500, would have been only $77,500 if Wal-Mart had not already been recently cited for similar violations at other locations in 9 states. In a survey of notable cases resulting in similar penalties for repeat violations issued by OSHA between April 2011 and February 2012, SafetySmart Compliance, an OSHA compliance guide website, the $365,000 February fine stands out as the second-largest on the list. In an analysis of the case, law firm Markhoff & Mittman, P.C. states that Wal-Mart has been cited for similar violations over the years and safety risks do not seem to be improving in some locations.

Wage and hour violations While Wal-Mart executives proudly boast of the companys relentless pursuit of labor expense reductions, the companys history of systematic wage and hour law violations in the United States has been extensively documented. The company took the visible and costly step of settling 63 pending wage and hour classaction lawsuits for a maximum of $640 million in December of 2008. Since then, it has settled at least seven more classaction wage-and-hour cases for an additional $345 million. The company also paid $5.3 million in back wages and civil penalties to 4,500 Vision Center employees in a case settled with the Department of Labor in May 2012. The DOL found that Wal-Mart had misclassified the workers as exempt from the Federal Labor Standards Acts overtime requirements, illegally denying them overtime pay. In its most recent Form 10-K filed with the Securities and Exchange Commission, Wal-Mart disclosed that it remains a defendant in numerous wage and hour class actions, and has continued to appeal a ruling in one such suit. The case in question, Braun/Hummel v. WalMart, went to trial in 2007, at which point the plaintiffs were awarded $187.6 million in compensation and lawyers fees the largest class action verdict in the states history. In June 2011, an appeals court found that the $45.8 million awarded in lawyers fees as part of the verdict may be too high and needs to be recalculated. Wal-Mart plans to take the case to the Pennsylvania Supreme Court, but if the 2007 award is upheld, this would bring Wal-Marts total costs for wage and hour class-action settlements and verdicts up to $1.18 billion since December 2008.

Gender, race, disability and religion Wal-Mart continues to face formidable challenges in court related to gender discrimination in pay and promotions. Although class certification in the Dukes v. Wal-Mart national class action was blocked by the Supreme Court in summer 2011 for technical reasons, two regional class-action complaints have been filed, in California and Texas. In June 2012, the plaintiffs counsel and co-counsel also announced that nearly 2,000 individual charges in 48 states and in every Wal-Mart region have been filed with the Equal Employment Opportunity Commission alleging gender discrimination in pay and promotions. Wal-Marts reputation has also taken a hit for other recent discrimination and harassment lawsuits. Between June 2006 and August 2012, Wal-Mart has settled at least 9 EEOC cases for $13.4 million related to disability discrimination, gender discrimination, racial discrimination, religious discrimination and sexual harassment. The most notable of these settlement occurred in March 2010, when the company paid $11.7 million to settle an EEOC classaction case alleging that a Wal-Mart distribution center in Kentucky systematically denied jobs to female applicants and used gender stereotypes to fill entry-level positions.Non-EEOC lawsuits related to discrimination have also resulted in formidable costs for the company, including a $17.5 million settlement in 2009 for a classaction lawsuit in which plaintiffs claimed that Wal-Mart discriminated against African-American truck driver applicants.

Also in 2009, the Massachusetts Supreme Judicial Court unanimously upheld $2 million in compensatory and punitive damages against Wal-Mart in a gender discrimination suit. Violations in Wal-Marts supply chain Public scandals and legal violations continue to occur at Wal-Mart contractors and subcontractors throughout the companys supply chain, both in supplier factories and in warehouses that store and move goods sold at Wal-Mart. The logistics industry In the case of the logistics industry, a recent wave of regulatory citations and worker unrest at multiple of Wal-Marts national warehousing hubs has created uncertainty for the smooth distribution of goods in the United States. In Southern Californias Inland Empire and in the Chicago area, warehouse worker advocates have found conditions in the industry to be deplorable and in many cases illegal. Southern California and Elwood, Illinois, are central hubs of Wal-Marts vast national distribution system, making it one of the largest clients of the warehousing and logistics industry in these regions. Wal-Marts distribution system relies upon the use of third-party contractors in shipping and storing, and these companies in turn rely largely on the labor of temporary workers dispatched through staffing agencies. According to a recent report by the National Employment Law Project, in the Inland Empire, labor violations in the warehousing industry are widespread. Violations found include lack of overtime pay, piece rate pay schemes that only lead to compensation for select portions of work performed, illegal and falsified pay records, and hazardous workplace conditions. NELP goes on to argue that despite Wal-Marts high degree of involvement in setting the parameters for working conditions at it warehousing and logistics contractors facilities, outsourced workers laboring on Wal-Marts behalf toil at the bottom of a complex hierarchy of intermediaries and in alternative employment schemes that leave them vulnerable to significant worker rights abuses and unsure where to seek redress, while Wal-Mart skirts responsibility for the impacts of its business model on these workers because they are not direct company employees. In response to these conditions, Warehouse Workers United (WWU), a group of warehouse workers in the Inland Empire, and Warehouse Workers for Justice (WWJ), a similar organization in the Chicago area, have united hundreds of workers in Wal-Mart warehouses in an effort to raise standards in the industry. Recent actions taken by WWU have exposed the poor labor practices utilized by Wal-Marts contractors and subcontractors in the Inland Empire, putting these companies in significant financial and legal risk. WWU has reported health, safety and labor violations at Wal-Mart controlled warehouses to Cal/OSHA and the California Labor Commissioner, which has led to inspections at multiple facilities resulting in over $1.3 million in citations. Penalties so far include: $499,000 to a subcontractor for failure to provide itemized wage stubs $616,250 to a subcontractor for failure to provide proper wage statements $256,445 to two subcontractors for multiple safety violations The two larger penalties are connected to violations at Wal-Marts largest distribution center in the region, run by Schneider Logistics. The organization filed another complaint over

unsafe conditions at a separate Wal-Mart-controlled facility in the region in July 2012. WWU and WWJ have also assisted workers in filing multiple class-action lawsuits against staffing agencies and warehouse operators in California and Illinois over the past several years. In addition to these lawsuits, workplace unrest in Wal-Marts logistics and warehousing supply chain in Southern California, Illinois and New Jersey is growing significantly, as these contracted and sub-contracted workers have started to identify ways to hold Wal-Mart responsible. Warehouse workers and ally organizations have explicitly identified Wal-Mart as a major client in these warehouses, and national and international publications, including the New York Times and the Guardian, have published features about the warehouse workers struggles. In addition, the workers have argued in court, with preliminary success, that staffing agencies and warehouse operators are jointly liable for labor and safety violations in warehouses. Given Wal-Marts level of involvement in the day-to-day operations of the facilities, it seems likely that the worker organizations might eventually demonstrate that Wal-Mart also has liability for legal and regulatory violations at the warehouses, since it acts as a joint employer in many cases. Lastly, the extensive problems at Wal-Mart-controlled facilities are explicit violations of Wal-Marts own Standards for Suppliers. WWU filed a formal ethics complaint with the company over this issue in August 2012. More significantly, in September warehouse workers in both Southern California and Illinois engaged in separate work stoppages in protest against retaliatory actions taken against workers attempts to stand up for their rights and address the problems in the Wal-Martcontrolled warehouses. On October 1st, 600 community supporters converged on one of the striking warehouses in Elwood, Illinois and were met by riot police. Seventeen people were arrested for civil disobedience and the warehouse was forced to shut down for the day.

Striking warehouse workers in Southern California returned to work on September 28th; striking warehouse workers in Illinois. Wal-Marts suppliers of goods Recent reports by whistleblowers and outside observers reveal that many Wal-Mart suppliers of goods around the world also continue to violate local laws and Wal-Marts Standards for Suppliers. Scott Nova, corporate social responsibility expert and Executive Director of the Worker Rights Consortium, calls Wal-Mart the leading corporate contributor to the persistence and pervasiveness of abusive and exploitative labor conditions in global export manufacturing. Workers rights organizations from around the world continue to uncover new labor violations in Wal-Marts supply chain, suggesting systemic, widespread failures in WalMarts prevention and handling of these issues. Recent notable cases: In April 2012, the National Guestworker Alliance uncovered pay violations, excessive overtime and forced work at C.J.s Seafood, a crawfish supplier in Louisiana employing Mexican guestworkers that sold 85% of its product to Wal-Mart. In July, the Department of Labor levied $248,000 in fines, back wages and damages against the company because of

serious safety violations, willful violation of laws regarding the use of temporary foreign workers, lack of overtime pay, illegal wage deductions and pay below the minimum wage. The New York Times published multiple stories about the C.J.s case, including an editorial on July 8, 2012, Forced Labor on American Shores. The piece pinpointed the nexus between Wal-Marts ruthless cost-cutting efforts and rights abuses at suppliers: When companies force suppliers to slash costs, corners will be cut and workers will be abused. The National Guestworker Alliance also reported in June 2012 that in a survey of 18 other U.S. Wal-Mart suppliers utilizing H2-B guestworkers, 12 of them had accrued 622 federal citations for safety, health, and wage and hour violations since the 1980s as well as dozens of federal lawsuits alleging significant violations of civil and labor rights law. Eight of the 12 companies had accrued one or more of these violations since 2005. In April 2012, workers at Phatthana Seafood, a shrimp processing plant in Songkhla, Thailand, went on strike to protest human trafficking and poor working conditions. Phatthana is part of PTN Group, and PTN Groups shrimp is distributed by Rubicon Resources LLC, a large Wal-Mart supplier. Most of the workers at Phatthana are migrants from Cambodia and Myanmar, and the factory allegedly confiscated the workers passports, held the workers in debt bondage, and paid them so little that they could not afford to eat. Similar reports also came to light around the same time regarding a Wal-Mart pineapple supplier in Kanchanaburi, Thailand, Vita Foods. When Human Rights Watch confronted Wal-Mart about these issues, the retailer simply denied that Phatthana has ever supplied shrimp to WalMart, despite documented evidence that shrimp from the company was sold on Wal-Marts shelves in the United States as well as Wal-Marts own past advertisement of its relationship with Rubicon as a sustainable supplier. Other reports of serious labor violations at WalMart suppliers all over the world continue to surface, including recent reports of serious pay, labor rights, and safety violations in China55 and Jordan.

Wal-Mart continues to struggle with reputation problems Bad news about worker treatment, discrimination and legal compliance issues has a material impact on Wal-Marts ability to appeal to customers. A confidential report prepared for WalMart by McKinsey in 2004, at a time when the company was being barraged by complaints from labor and environmental organizations about its irresponsible practices, found that up to 8% of Wal-Mart customers surveyed had stopped shopping at the store because of negative press they had heard. A sampling of other brand rankings reveals continued challenges to Wal-Marts stature: Harris Interactive annually asks a sample of Americans to identify the 60 most visible companies and then surveys to rate those companies reputations. In 2012, Wal-Mart ranked 41 out of 60, trailing many of its competitors like Amazon (#4), Kohls (#16), Costco (#19) and Target (#27). Not only did it lag behind this group of competitors, but Wal-Marts ranking dropped while the others rose. On Fortunes list of the most admired companies in the world, Wal-Mart dropped 13 places in 2012, falling to #24.59 Amplicate, a social media analytics firm, declared Wal-Mart the least loved department store on social media. Complaints made about the company focused on working conditions, low salaries, low quality products and poor customer service.

Wal-Marts response to its reputational blunders in recent years has cost the company hundreds of millions of dollars and has taken up executives valuable time, even though the root cause of its poor reputation an internal culture of non-compliance has yet to be addressed. Untold hours have been spent by top-level Wal-Mart personnel in an attempt to soften the companys image, however in the wake of the widely publicized Mexico bribery scandal61Wal-Marts most recent 10-Q notes that the bribery allegations and resultant investigations may require the involvement of certain members of the Companys senior management that could impinge on the time they have available to devote to other matters relating to the business. Spending related to reputation and branding has also increased significantly. Wal-Marts annual advertising budget has steadily increased in recent years, excluding a small dip in FY2012. Even including the slight recent decline, the companys advertising budget in FY2012 was 44% larger than it was in FY2006 and 138% larger than it was in FY2004.63 Q1 and Q2 2013 reports noted that the advertising budget also increased in these two quarters.64 The companys charitable giving, an issue that the companys public relations materials heavily emphasize, has skyrocketed in recent years. The total dollar value of cash and in-kind giving from Wal-Mart and the Wal-Mart Foundation globally in FY2012 was $958.9 million, up 564% from FY2004 (the earliest year data is available on the companys website.) Abusive conduct hinders growth efforts Regenerating strong sales growth at Wal-Mart US will depend to a great degree on successful new store openings. However, at the start of this century, the major greenfields for WalMarts future growth were urban America the Northeast, West Coast, and Chicago. WalMart has saturated much of rural and suburban America to such a degree that it is cannibalizing its own stores in many of those areas. In 2009 Wal-Marts then-Vice Chairman, Eduardo Castro-Wright, proclaimed that Wal-Mart could increase its sales by $80-$100 billion via expansion into Americas urban markets. He went on to say that Wal-Mart had in place a robust real estate program to go after that opportunity. Castro-Wrights observation wasnt the first time that Wal-Mart had identified this opportunity. Earlier in the last decade the company had made a push to build stores in Chicago, New York City and Los Angeles among the largest retail markets in America only to be greeted with stiff opposition from residents and leaders of those communities who were uninterested in welcoming Wal-Mart and its poor labor practices. In 2006 USA Today described Chicago as the epicenter of a debate around wages at large retailers ever since the city rejected a proposal by Wal-Mart Stores Inc. to open a store on the South Side The Chicago City Council went as far as passing an ordinance, later vetoed by the Mayor, requiring big box stores like Wal-Mart to pay a minimum wage of $10 along with at least $3/hour worth of benefits. In 2004, in Inglewood, a city in the LA metro area, after opposition from elected officials to the opening of a new store, the company put forth a ballot initiative in an effort to exempt itself from zoning and environmental restrictions. However, residents rejected the proposal with 60% saying no to Wal-Mart.

In 2005 after a failed effort to open its first store in New York City, then-CEO Lee Scott told New York Magazine: I think New York will be good for us and well be good for New York. And make no mistake; he added emphatically, We will be in New York. After that first failure in Queens the company turned its eye to Staten Island. Yet once again, it found itself facing significant opposition. This quote from a Staten Island resident encapsulates the challenge Wal-Mart faced we need this Wal-Mart like a hole in the head this is a corporation that has a lot of baggage about how it treats its employees. Two years later with still no stores in the city, Scott told reporters and editors from the New York Times that I dont care if we are ever here [New York City]. After succumbing to this string of defeats the company began an offensive to remake its image, spending millions of dollars on advertising, increasing charitable giving, and undertaking a number of public initiatives on the environment, food deserts, healthy food and womens empowerment to name a few. In FY2012 Wal-Mart and the Wal-Mart Foundation gave $872.7 million in cash and in-kind gifts in the United States.Often these initiatives were undertaken in the same cities in which its earlier efforts to open stores had failed, all with an eye toward reducing opposition to future store openings. As expected the company again refocused on urban America with a hope that its rebranding effort would stick. But it didnt. Even while it was handing out millions of dollars in grants in cities around America residents raised concerns about who Wal-Mart really was and what it would mean for their communities. In New York City, after rumors began that Wal-Mart was negotiating with developers in Brooklyn, residents quickly mobilized and formed Wal-Mart Free NYC. To date the coalition has successfully blocked the companys entry into this site even though it requires no political approval. Crains New York Business opined in early 2012 that Wal-Marts window of opportunity is closing in New York City and cited the opposition of labor unions as a contributing factor. And when rumors began to circulate about Wal-Marts interest in Queens, the developers of that property quickly issued a press release asserting that We have not had any talks with Wal-Martand we have no intention of discussing this site with them. The New York Observer reporting on the issue titled its story Just How Desperate Is Wal-Mart to Open in New York And Have They Lost All Their Allies? A major setback for the company occurred in September when it lost its bid to open a supercenter at the Gateway II site in Brooklyn; the location will instead be occupied by a unionized grocery store. Another city the company has long courted is Washington DC. In 2010, Wal-Mart announced that it had selected four sites to open stores in the city that number later grew to six with a plan to open stores in late 2012.78 Like New York, a coalition opposed to Wal-Mart, Respect DC, rallied to confront the company. In April of 2012 Wal-Mart reset the opening of the stores to the end of 2013 after facing some resistance from activists and opponents And in an August report from this year a reporter updated Wal-Marts status this way: Now with the clock ticking down on 2012, just one of those six sites has begun construction, another has been reduced to a gaping hole in the middle of a retail corridor, and the remaining four are only in the permitting process.80 The article went on to note that some residents opposed Wal-Mart because of the wages and working conditions of its employees.81 In the Boston metro area the company recently abandoned plans for two stores saying that the projects no longer made financial sense. The council president of one of the towns said he believes residents strong negative reaction to a Wal-Mart store in their town influenced the retailers decision to put aside its plans.82 The companys current plans to open its Neighborhood Market format in major metropolitan centers may cause further community relations problems as its business model is based on reducing the number of

employees staffing the stores as well as spending less on initial construction costs. These elements of the Neighborhood Market strategy appear to undermine one of the primary selling points company officials have used in appealing to community groups and elected officials in urban markets across the USthat Wal-Mart will bring needed jobs. A failure of governance Wal-Marts apparent failure to institute rigorous internal controls that would prevent the kind of legal and regulatory violations the company has become known for has significant implications for investors. The companys reputation continues to suffer from reports of wage and hour violations, race and gender discrimination, retaliation against worker organizing efforts, as well as the recent Mexico bribery scandal. This lack of effective internal controls is not a new issue, and investors identified it almost ten years ago, and the companys longstanding failure to address it has only increased the negative consequences for investors. Those negative consequences include increased costs from judgments, settlements and fines and the accompanying legal fees and also harm to Wal-Marts reputation. The negative reputation garnered from the compliance failures limits the companys ability to expand both domestically and internationally, while the operational effects of lax internal controls are reflected in worker and customer dissatisfaction. A history of shareholder engagement In 2005 and 2006, a group of Wal-Mart shareholders made a concerted attempt to engage with the Board of Directors about the companys pattern of flagrant law-breaking, the Boards lack of oversight of these issues, and their potential risks to investors. The group of large institutional investors involved was led by New York Citys then- Comptroller William C. Thompson, Jr. and included the New York City Pension Funds, the Illinois State Board of Investment, the California State Controller, F&C Asset Management, Hermes and Universities Superannuation Scheme. At the time, the four groups collectively owned 11.5 million shares of Wal-Mart stock worth $545.8M. Concerned about recent reports of legal and regulatory non-compliance,84 the funds primary request was that the Wal-Mart Audit Committee establish a sub-committee of independent directors with the assistance of outside counsel to review Wal-Marts internal controls designed to ensure compliance with laws, regulations, and company policies, reporting directly to shareholders. The Committee refused this request, calling the shareholders concerns neither necessary nor appropriate. The investor group then sent a detailed disclosure request to the Committee covering WalMarts internal controls, whistleblowing policies, workforce management systems, supplier code of conduct compliance, and compensation systems which the Committee never meaningfully addressed. The investor group found Wal-Marts response to the engagement to be overly general and insufficient, resulting in no changes to Wal-Marts policies related to legal and regulatory compliance or the oversight and disclosure of these issues. The list of questions that the investor group sent to the Audit Committee, in November 2005, suggests that many of the public and legal scandals the company has faced in the intervening years might have been prevented if the Committee had given the issues meaningful deliberation when confronted then. After the failed dialogue, the investor group filed a resolution for consideration at the

2007 shareholder meeting. The resolution called upon the Board of Directors to issue a report on the social and reputational impacts of reported and known cases of management non-compliance A representative of one of the institutional investors stated that weaknesses in internal controls have eroded the companys reputation [and] We fear that its failure to deliver on these policy commitments is inhibiting Wal-Marts ability to expand into new domesticmarkets. After the Mexican bribery scandal, the current New York City Comptroller reminded investors that Wal-Marts board has repeatedly rebuffed our office and the New York City Pension Funds when we have raised concerns over the companys failure to comply with legal and ethical standards. It is important to note that the Mexico bribery scandal, only made public in a New York Times expos in April 2012 and described below in more detail, took place between September 2005 and early 2006, concurrent with the investor groups attempts at engagement over compliance issues with the Audit Committee. An internal Wal-Mart memo released by the New York Times suggests that then-chair of the Audit Committee, Roland Hernandez, was notified of the bribery scandal by November 16, 2005. Since the unsuccessful attempt to engage with the Audit Committee, shareholders have taken other types of action to signal to the Board that Wal-Marts lack of internal controls pose serious long-term risks to investors. These actions include shareholder proposals, no votes on candidates for the Board of Director voting, divestiture, and shareholder lawsuits. Internal compliance controls continue to fail In the seven years since New York City Comptroller and others pursued dialogue with WalMarts Audit Committee about its insufficient internal controls, numerous public reports of internal scandals and legal and regulatory violations have occurred. The potential costs of these violations are likely a weight on the companys stock price. The list of recent violations bears a striking resemblance to the list of legal and regulatory issues facing the company when the Comptroller approached the Audit Committee in 2005 it includes allegations of legal violations by high-level executives, violations of U.S. retail workers legal rights, and gross discrepancies between Wal-Marts Supplier Code of Conduct and the realities of working conditions at Wal-Marts suppliers. Mexican bribery scandal Most prominent of the many public scandals Wal-Mart is currently embroiled in is related to allegations of bribery at its Mexican subsidiary, Walmex. In a New York Times expos97 in April 2012, it was revealed that top Wal-Mart executives allegedly covered up whistleblower reports of the widespread use of bribes of Mexican officials totalling $24 million to facilitate new store openings between 2002 and 2005. As a result of these allegations, Wal-Mart is under investigation by the Department of Justice, the Securities and Exchange Commission, and multiple Mexican agencies. The company has also retained outside counsel to conduct an expanded internal investigation into FCPA compliance in countries believed to be higher-risk for corruption: Mexico,

China, Brazil, India and South Africa. These countries represent large operations for WalMart (Mexico, China, Brazil, South Africa) as well as countries with immense growth potential (China, Brazil, sub-Saharan Africa, India). Curiously, the scope of the investigation, which is overseen by the companys Audit Committee (itself implicated in the cover-up), does not include Argentina. U.S. Representatives Elijah E. Cummings, Ranking Member of the House Oversight and government Reform Committee, and Henry A. Waxman, Ranking Member of the House Energy and Commerce Committee, launched a Congressional investigation into the allegations on April 23, 2012. Wal-Mart spent $34 million and $51 million in expenses related to FCPA investigations in the three and six months ending July 31, 2012, respectively, with the expectation that it will spend and additional $70-$80 million in the following two quarters. The federal investigations, related subpoenas and requests for testimony and information, and shareholders lawsuits also pose the risk of a variety of negative consequences, as outlined in Walmexs Q2 2012 Financial Statement Notes. Past FCPA fines in other cases have amounted in some cases to around 1% of a companys sales in Wal-Marts case equal to $4.5 billion. The bribery allegations have also resulted in close to a dozen shareholder lawsuits against Wal-Mart, its executives and its Directors, including one securities class action and multiple derivative lawsuits. In the companys latest quarterly filing, it was noted that the bribery allegations may result in ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen. 6. Conclusions Walmarts core competitive advantage is that delivers the lowest possible price and its business strategy is aligned with this advantage, based on cost leadership (Johnson, Scholes, and Whittington, 2010). Its wholesaler Business Models supports this strategy, all elements focused on using the least amount possible of resources, always looking into how to improve performance and effectiveness. As has been exposed previously, Walmart Business Model is an example followed by its competitors. Taking into account its financial results, Walmarts Business Model is a very successful one. However, Walmart effects are not always positive. On the other hand, Walmart success is based on applying this business model to every activity that undertakes. And experience has proven that this is not always the best approach, for example, when it comes to compete in different markets, such as Germany. The sustainability of Walmarts Business Model will depend on its ability to adapt within the changing environment, continuously satisfying customers needs and capturing the biggest value. While doing so Walmart will have to revise its activities and match them with the image of a social corporate responsible business that is developing.

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